We have on frequent occasions penned Supply Chain Matters commentary related to the increasing occurrence of counterfeit or bogus goods across multiple industry and governmental supply chain networks. This growing issue has impacted product-related as well as refurbished product supply chains and has contributed to a more important consideration in supply chain risk identification and mitigation. In December, we noted how this problem has spread across the most sensitive of supply chains that being the defense-oriented supply chains of U.S. military agencies.  In both industry and defense sectors, unsavory operators have developed sophisticated techniques to counterfeit brand trademarks on components, taking advantage of unsuspecting buyers in their quest to find lowest-cost supply, or tap secondary distribution channels.

Another wake-up reminder to this growing problem will now catch the attention of certain BlackBerry© smartphone owners.  This week, the U.S. Consumer Product Safety Commission announced that about 470,000 BlackBerry batteries distributed by Asurion are being voluntarily recalled due to an overheating and safety problem.  According to the recall notice, the batteries in question are counterfeit, and “these batteries were used across virtually all modes of refurbished BlackBerry devices distributed by Asurion prior to November 1, 2009.” Readers should note that Asurion is a well-known provider of consumer electronics add-on protection services for many mobile phone providers.  Their marketing tag line reads: Your Technology Protection Company.

The sobering aspect to this recall is that the batteries of suspicion carry a BlackBerry brand, which implies that an  uncertain number counterfeit batteries penetrated the supply chain without apparent detection.  The Recall Alert in-fact  provides a rather revealing phrase concerning the origins of these suspect batteries: Manufactured In: Unkown The fact that the dates of shipping span as far back as March 2004 is another concerning sign.  The Notice indicates that Asurion has received two reports of these suspect batteries causing minor burns. The CPSC notes that it is still interested in in receiving incident or injury reports that may be directly related to this incident.

I strongly suspect this incident will provide interesting challenges for consumers  with refurbished BlackBerry’s, since identification of genuine vs. bogus batteries will be key to mitigating this recall in a timely and cost effective fashion.  A web site has been referenced to provide consumers with information on how to identify the counterfeit version. Yes ladies and gentlemen, you have to identify if your battery is counterfeit based on various images of batteries.  The bottom of this Battery Exchange web site also notes that consumers should not contact Asurion directly, that this exchange program is being administered by a separate administrative entity.  That is even more interesting, adding a separate entity to the exchange and mitigation process.  Does anyone recall that past incident with Dell’s defective laptop batteries?  Dell clearly communicated the location of a web site where consumers could input a serial number and get real-time feedback if that battery was subject to recall.  I visited Asurion’s web site and as of this writing, there is no mention whatsoever of this recall program, or a reference to the separate battery exchange web site.  Interesting indeed.

The ever increasing popularity in smartphones and sophisticated consumer electronics brings with it high expectations for product reliability and customer service. Consumers pay premiums for these products because of the expectation that these are premium and durable products. Buying an add-on assurance program just adds more to these expectations. Being informed that the prime power source of your device may be counterfeit, trying to locate clear information, and having to determine this on your own based on visual inspection is not what consumers want to hear.

A supply chain risk mitigation plan must include means to quickly trace and identify suspect parts, and also be able to quickly respond when a potentially harmful quality problem arises. Clear and open communication is critical.  Think of Toyota’s latest incident.  Having just heard from the U.S. government that sticky accelerator pedals may have indeed been the root-cause of the recent rash of UIA incidents will not take away the damage that was done to brand reputation.

Quality or conformity of components applies not only to individual brand owners, but their add-on service and reverse logistics providers as well.  All involved are extensions of the brand, and consumers can often be unforgiving.

Bob Ferrari

A few weeks ago, Colin Masson of Microsoft’s Cloud Computing initiative called my attention to a rather innovative implementation story occurring in the automotive aftermarket parts sector, specifically related to GCommerce, a software-as-a-service provider catering to this sector.  As some readers might speculate, I tend to get many of these alerts from technology vendors, but I must admit this was a special situation which is due a mention on the Supply Chain Matters blog.  Too often, technology vendors tend to hype the technology vs. the more important factors that make a significant information technology initiative successful.  That includes a sponsor who absolutely understands the needs, stakeholder interests and the associated economics related to the business problem at hand.

The $300 billion automotive aftermarket parts business presents its own unique supply chain challenges, but in many respects is similar to many wholesale or parts distribution networks.  The severe economic downturn motivated many consumers to hang on to their older vehicles, thus creating increased demand for repair parts. There are currently over 350 million autos operating in the North American market, and the parts distribution network consists of over 1000 large commercial buyers interacting with upwards of 4000 suppliers and/or manufacturers.  Since the mid-nineties, increased specialization within specific vehicles have driven up SKU counts nearly 400% and number anywhere from 6 to 9 million different part numbers. That is a formula for high overhead and inventory cost.

As with many supply chain frameworks, the 80/20 Pareto principle has strong applicability in this sector, 80% of the business is driven by 20% of products and  suppliers. Intense industry-wide inventory pressures have driven many suppliers to cutback on overall stocking, opting instead for replenishment or direct drop-ship order processes between parts distributors and suppliers.  These direct orders created havoc among participants since each supplier tends to mandate a different process or systems interface.  The needs for greater efficiency, industry-wide standards and consistency in real-time inventory inquiry and procurement processes are an obvious business problem.

Within this business situation was the perfect storm of two players, GCommerce, which has deep industry process and distribution domain knowledge, and Microsoft, seeking opportunities to demonstrate the power of its collection of cloud computing technologies. Steve Smith, President and CEO of GCommerce, proudly states that he grew-up within the wholesale auto parts industry, and after interviewing Steve, I have no doubts to that claim.  He founded GCommerce in 2000, just prior to the infamous dot.com era, where the promises of electronic procurement trading exchanges connecting multitudes of buyers and sellers were the rage.  History tells the real story on how complex and expensive those approaches ended up to be, and industry participants can surely provide a history and account of Covisant, an exchange developed by the major automotive OEM’s.

GCommerce chose a more laser focus, targeting the aftermarket parts sector and building a backbone EDI-related infrastructure that would connect buyers, sellers and associated transactional networks. More importantly, the company built strong relationships with the key aftermarket industry stakeholders such as Gates, K&N, Lisle, Tenneco and others. The goal however remained a means to support a seamless inventory management, procurement and order fulfillment process without the huge expense of a centralized data warehouse and IT infrastructure. GCommerce also understood that their business model would not be successful if it included a high concentration of owned IT infrastructure.

Smith was fortuitous enough to challenge Microsoft, and specifically Rahul Auradkar, Director in the cloud computing group to help solve this problem.  Rahul brought to the table his previous experience in that company’s  Server and Tools business.  Microsoft was challenged to come up with a solution in 90 days, and the end-result was a new platform termed the Virtual Inventory Cloud (VIC™).  VIC™ is powered with a full relational database and leverages Microsoft’s Windows Azure and SQL Azure components, with the ability to ultimately handle millions of transactions. Parts buyers can login into the VIC ™ system to gather inventory status or send electronic drop-ship orders directly to individual parts supplier business systems.

Thus far, the company has amassed over 1000 suppliers and 200 major commercial buyers within VIC™. An incentive of a preferential yet simplistic pricing model has clearly helped. Steve coins this as a “Southwest model”, (reflecting that discount airline) with $25/$50/$100 flat-rate monthly transactional volume fees paid by suppliers, while distributors pay for a user license and one-time setup fee.

GCommerce and VIC™ are on the path toward providing a common business solution that is aligned with industry needs for an elegant and cost-affordable answer for automating the aftermarket drop-ship process.  In this author’s view, it is also an effective demonstration of the applicability of a cloud computing platform strategy to solve a specific business problem need.  VIC™ will surely grow its network and further scale in handling larger transactional volumes, and my sense is that this approach has potential applicability to other parts and inventory distribution fulfillment networks.

 Bob Ferrari

I was traveling and vacationing last week, and I’m now catching-up with some supply chain news over these past few days. 

One of the more interesting and eye catching supply chain stories was that related to Southwest Airlines, which has again been cited by the FAA for a significant maintenance lapse.  On Saturday, August 22, a dispute between the FAA and Southwest over the use of potentially unauthorized parts forced the airline to temporarily ground 46 of its 737 aircraft, nearly 10% of its fleet, forcing significant delays in its service operations. The parts in question, an exhaust gate assembly, functions to protect movable panels on the rear of the wings from being damaged by hot engine exhaust, and according to both the FAA and Southwest, does not pose an immediate safety issue.  According to an article in the Wall Street Journal last Wednesday (subscription may be required), FAA inspectors and managers maintain that since the specific parts were never authorized for aviation use, the planes containing these parts were technically not fit to carry passengers. According to this WSJ article, an FAA inspector uncovered the parts discrepancy “during a routine inspection” and since then, Southwest “has told us that it plans to replace all of these parts on the affected planes.” Both the FAA and the airline have come up with a plan to replace the suspect parts in less than two weeks.

A follow-on article in today’s Wall Street Journal indicates that the unauthorized use of the subject parts has occurred for up to three years on 82 planes, and has now presented a vexing policy question for the FAA as to forcing airlines to ground planes even though the violations don’t pose an immediate danger to air safety. Southwest has indicated that swapping out all of the suspect parts could take up to three more months. The FAA in-turn is concerned that allowing Southwest to continue flying these suspect jets could set a precedent for other carriers to seek similar special treatment in the future.

In my view, there are much broader issues at stake here, those related to the operation and maintenance procedures of discount air carriers, as well as the issue of supply chain risk and control.  First, Southwest has been the benchmark for many of today’s discount carriers in obtaining maximum operational use of fleet aircraft.  We have all more than likely experienced the quick, less than 30 minute turnaround of flight landings and departures, as well as the maximum utilization of aircraft during any given 24 hours of flight schedules. The unstated question is whether the emphasis of low cost and cheap airfares that leads to maximum utilization of aircraft use is adequately supported by required and properly scheduled maintenance. There is an excellent exchange of commentary attached to the initial WSJ article that debates the pros and cons of cheap airfares and proper maintenance. One commenter reminds us that two previous FAA inspectors who were overseeing Southwest maintenance standards have since been transferred, alleging that there may have been a  “too comfortable” relationship regarding oversight.

The other issue relates to the contracting of maintenance to a third-party, that, in-turn, may sub-contract that maintenance to another firm. As the latest WSJ article points out, Southwest has had a history of outsourcing maintenance to a U.S. based contractor D-Velco Aviation Services, that in turn, subcontracted work on the affected systems to another company that was not authorized by the FAA to provide the particular parts.  Southwest has suspended D-Velco as a maintenance contractor.

Readers may further recall that there have been other maintenance incidents directly attributed to Southwest.  In March of 2008, 44 of its older jets were grounded to inspect for possible structural damage after it was revealed that the airline chose to keep flying 46 jets that had overdue safety inspections for fuselage damage. At that time, the FAA imposed a record $10.2 million fine on Southwest. An article in the Dallas Morning News in March of 2008 quoted Southwest CEO Gary Kelly on Southwest’s continued commitment to safety, and another Southwest spokesperson pointed to the airline’s ongoing internal investigation of its maintenance operations and compliance with required work.

It is time for both Southwest and the FAA to establish renewed efforts for what is acceptable maintenance and parts control standards for discount air carriers.  The notion and/or perception by the traveling public that discount air carriers can find means to “get-around” required maintenance and inspections in order to maintain schedules needs to be put to rest.  The traveling air passenger needs the assurance that aircraft, no matter how much utilized or how long in service, has had both required maintenance and is safe to continue flying.  Yes, reason should prevail relative to what may be deemed a threat to aircraft safety or air worthiness vs. other maintenance.  Airlines in turn have another reminder that outsourcing of maintenance, for the sake of cost, does not include the outsourcing of responsibility for adhering to required maintenance and parts specifications.  Airlines that choose to practice full conformance with maintenance and safety of aircraft should not be placed at a de-facto cost disadvantage.

We trust that Southwest, as well as other discount air carriers, and the FAA, will hopefully learn again that efficiency must not compromise on required maintenance and adherence to parts specifications. Surely, now is the time to adopt standards that can keep the airline industry solvent but at the same time, safe.

Bob Ferrari

July is normally a quiet period in the world of supply chain technology as vendors and employees wind down from the Q2 quarter-end revenue push, as well as the need to take some summer vacation time.  This has not been the case in the service parts planning domain.

In case you missed the July 9^th announcement, Marlin Equity Partners acquired Servigistics, a prominent service parts planning and management software provider.  This acquisition is an obvious strategic follow-on to Marlin’s previous acquisitions related to Click Commerce. 

In May, Marlin announced the acquisition of three operating units of Click Coomerce, which included the Service Network Solutions (SNS) business and Contract Service and Management (CSM) business.  The Click SNS business consisted of the aggregation of many former service parts planning providers, the most notable being the former Xelus. Other former names included World Chain and Optum. Marlin also communicated that the CSM business would be integrated with Emptoris, a new equity partnership that Marlin established back in December. Supply Chain Matters has previously commented on the implications of the CSM assimilation within Emptoris.

If your brain is spinning trying to understand all of this, you may not be alone.  There has been some interesting commentary being generated in the blogsphere and among industry analysts, and I will add my perspective as well.  Bruce Richardson of AMR Research noted in his The Future of Enterprise Software blog that this combination of Servigistics and SNS will bring a stronger vertical industry presence and provides this market with a clear leader. On the other hand, competitor MCA Solutions penned on its Service Matters blog (no relation whatever to Supply Chain Matters) some very thought provoking comments that urge existing customers and prospects to exercise caution. While MCA is obviously protecting its own market interests, it does provide some pragmatic arguments.

There is no doubt in my mind that Marlin’s recent acquisition moves are opportunistic, taking advantage of strategic market opportunities to potentially consolidate the service management planning, services  and management software segment. Both Servigistics and SNS have been challenged of late in profitability and sales growth, in a market that provides a rather strong value proposition for investment. Both had initiated staff reductions and expense controls.

A significant evidence point for me supporting opportunism was the fact that in the May announcement, Marlin indicated that Dave Barboro will continue as President of the SNS group, yet in the recent announcement, Eric Hinkle, CEO of Servigistics, will assume the role of CEO, with Barboro assuming the role of Executive Vice-President. One could speculate that these two existing or former chiefs may not necessarily have the same views on future integration of customers, technology platforms, and strategic direction, and this new management team has to “flush out” direction.  The presence of Bill Atkinson of marlin in the role of Chairmen of the newly formed company is a critical one to watch.

My view for customers and prospective buyers tends towards caution as well.  If you are an existing Servigistics or Click SNS customer, you should be seeking clarity in the overall product integration and development strategy, and what that means to your existing investment  This is especially important since the web-native Servigistics platform is different than existing SNS software components, and decisions will have to be made regarding what scope of integration will be supported by the combined group.  Since profitability remains an objective, some structural decisions will be forthcoming.  I would also recommend you probe on levels of customer maintenance and service support, since its unclear whether this consolidation move is about purely consolidating customer maintenance revenues.

If you are contemplating a near-term investment in service parts planning software, you should step-back and take a second look.  The market landscape has clearly changed, and there is a bit more fuzziness related to composition of longer-term players. If you are seeking more specific assistance or counsel, let us know.  You can email bferrari at blog1 dot com.

Bob Ferrari

In December of 2008, I penned comments on this blog related to reports that indicated that a U.S. government audit agency had determined that the U.S. Navy had $7.5 billion (yes that is billions with a “B”) in excess spare parts.  My comments reflected on how the Navy needed to get serious about investing in modern service parts business processes and supporting technology.

I was therefore somewhat pleased to read an MCA Solutions press release this week that indicated that the U.S. Navy’s Naval Inventory Control Point had successfully implemented spare parts inventory optimization software.  The release further indicates that the MCA software is expected to be integrated with the Navy’s ongoing SAP ERP implementation project, scheduled for completion in early 2010. 

The next phase for service parts modernization is the Navy’s maritime and base operating stock inventory.

It’s good to see that the Navy is serious about moving forward and I applaud their team efforts and progress to date.  The previous audit identified almost $1.9 billion of spare parts inventory with no projected demand.  Perhaps those parts can now be put to alternative use.

A final related note.  There are few blogs that are solely focused on the service management and service parts planning area.  If you’re looking for a good listing, you can review a posting by Tim Andreae on the Service Matters blog.  Service Matters is not related to Supply Chain Matters, but MCA was nice enough to seek my opinion before naming their blog.

Bob Ferrari

An article in this morning’s Boston Globe caught my attention.  A recent government audit identified the fact that the U.S. Navy has at least $7.5 billion worth of excess spare parts stored in government warehouses.  Yes, that number reads “billion”, or the equivalent of half of the bailout money being requested by the U.S. Big Three Automotive companies. The article indicates specific examples, and notes that the Navy has nearly 2 million more aircraft parts than its own parts demand forecasts deem necessary, while storing more than 10 million ship parts designated as excess. Also noted was that last year the Navy had 85,700 “unique items” in its spare parts inventory, valued at $1.9 billion, for which there is no projected demand.

The Navy, like other military agencies, has come a long way in the understanding of world-class supply chain and inventory management techniques.  I have often run into military logistics officers at supply chain professional conferences such as CSCMP and SCOR.  Military logistics officers have degrees from the finest universities focusing on supply chain management disciplines. 

Investment in modern technology should also be a non-issue.  In 1999, the Navy chose SAP to power its Navy Enterprise Resource Planning Program, and according to an SAP brochure, has been working toward agency-wide convergence and standardized processes.  An initial investment in advanced service parts planning came with the selection of MCA Solutions, as a sub-contractor to CACI International, Inc. in 2006, supposedly to help the Navy modernize its inventory control system for, you guessed it, the F/A 18 fleet.

Auditors apparently claim several factors contributed to the unnecessary purchases, including inefficiency in inventory management and a limited ability to accurately forecast equipment needs.  While that may well be the obvious no-brainer conclusion, I suspect that given the evidence above, there is more to this than meets the eye.  If these modern systems are in place, where is the breakdown?  Which Navy entity isn’t listening to its skilled leadership?  Is it strategy, tactical planning, out-of-control procurement, or just inertia? Rather than speculate any further, I’ll defer to those with more inside knowledge of how all of this came about.  Perhaps specific individuals with this inside  knowledge would like to add additional background comments to this post.

In the meantime, perhaps the Navy would entertain a massive recycling program to recover some of its obvious excess parts. Interested in a radar system for your pleasure boat???

Bob Ferrari